The enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) brought sweeping changes to the Bankruptcy Code, but perhaps none more important to most unsecured trade creditors than a single word changed in 11 U.S.C. §547(c)(2). Prior to BAPCPA, proving that a payment was made in the ordinary course of business, and thus nonavoidable as a preference, required proof that the payment was not only made in the ordinary course of business between the particular debtor and creditor in question, but that the payment would also be in the ordinary course of business when measured against similarly-situated, but unrelated, debtors and creditors in a relevant industry.
Prior to BAPCPA, creditors faced with preference-avoidance actions could often point to a long-standing relationship with the debtor as demonstrable proof that the allegedly preferential transfers were consistent with the parties’ ordinary course of business. Preference defense counsel then had the unpleasant task of informing a client that an expert witness was still needed to testify that the terms given to this particular debtor and its actual payment practices would be ordinary as between other debtors and creditors in some undefined—but related—industry. This second prong of the ordinary-course test left counsel to recommend that the client pony up and retain an ordinary-course-of-business expert or that the client pay off the trustee to settle, even in cases where there was little real exposure.
Congress tossed unsecured trade creditors a bone with BAPCPA, altering the ordinary-course-of-business preference defense by requiring proof of either prong, rather than both prongs mentioned above. This seemingly minor change raised the possibility that creditors could defend preference actions solely using their credit history with the debtor, dispensing with the need to hire an ordinary-course-of-business expert. Preference defense counsel mused that preference actions might finally be decided on their merits rather than settled to avoid the cost of an ordinary-course-of-business expert.
We are now almost four years past the BAPCPA effective date, long enough for the first post-BAPCPA preference cases to have worked their way to conclusion and appeal. After what seemed like an interminable string of preference case decisions containing footnotes mentioning that the underlying bankruptcies were filed prior to BAPCPA’s effective date, we are starting to see the first cases decided under the new law.
While this milestone is worth noting, what is more notable is that nothing has really changed with respect to either the objective or subjective tests of §547(c)(2). The post-BAPCPA cases invoke, as one would expect, the pre-BAPCPA subjective and objective tests, noting simply that they are now disjunctive rather than conjunctive.
What remains to be seen is whether the disjunctive tests will embolden preference defendants to begin trying preference cases and potentially spur resurgence in subjective-test jurisprudence.